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Comment by roenxi | Hacker News Reader

I can think of three mechanisms to bring down house prices:

1) Build more houses

2) Reduce the amount of lending banks do

3) Distant third, if the government has mucked up the tax/renting incentives so much that people are leaving houses empty that should be fixed.

They all sound good to me. However, if the complaint underlying "prices are too high" is that people don't have a place to live then that can't be fixed without growing the stock of available housing. Growth is required. We don't want people to have to chose where they live because there aren't enough houses being built, we want them to move based on economic opportunity or because they like the lifestyle.

Traffic is different from housing. In a moment of flippancy, I suggest that nobody wants to be sitting in traffic, but they are happy to be sitting in their own house.

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I'd add:

4) move the jobs to less expensive cities. The discussion largely driven by a very small area in a few cities that have been extremely successful at job growth in tech, finance, and lobbying. There isn't a housing affordability crisis across most of the country.

I'd add:

5) move the people to less expensive cities. The discussion largely driven by a very small area in a few cities that have been extremely successful at job growth in tech, finance, and lobbying. There isn't a housing affordability crisis across most of the country.

> I can think of three mechanisms to bring down house prices: ... Reduce the amount of lending banks do

How will this reduce the actual cost of housing? If banks lend less, interest rates will go up, which will lower the value of homes. However, the value of the home will go down in proportion to the higher interest rates. So the homes will be valued less, but they will cost exactly the same taking into account the higher interest rates.

The only one who wins here are the banks who get higher interest rates.

:P I didn't say the real cost, I just said house prices. So I have a weaselly escape route on that one. Nevertheless...

You seem to be going to the real cost of housing; there are very complicated feedback loops and if there is a good argument for what should happen in theory I don't know it.

My personal belief is that if you reduce bank lending then they will discover they can't raise the interest rate enough to make up the losses from people borrowing less money. You might reasonably disagree.

Note that in practical terms the way a bank loan works is that a buyer can elect to jump to the front of the queue of buyers by promising some of their future earnings to the bank. Since all buyers have this option, the equilibrium is likely a bank extracts some portion of the future income from all the buyers without changing the ultimate order of the queue (the buyer with the most money is likely the one who can promise the best return to the bank to stay in front). It doesn't really cost the banks anything to create a loan, they just account the money into existence. That factors in.

Given that frame, it seems likely to me that reduced bank lending activity will be to the net benefit of the buyers at maybe some cost to the sellers. Exactly how it shakes out depends on the details of how lending activity is reduced.

> if you reduce bank lending then they will discover they can't raise the interest rate enough to make up the losses from people borrowing less money. ... it seems likely to me that reduced bank lending activity will be to the net benefit of the buyers

I agree with the first sentence, but not the second. Reducing a bank's ability to lend is similar to creating a price floor. It will certainly drive up interest rates, and this will effect each party differently.

Banks: Even though banks will make more money on each individual loan, banks will make less loans overall and it will be a net negative.

Home Owners: Obviously it will hurt home owners as the value of their home will decrease in proportion to the interest rate.

Home Buyers with Capital: The effect on home buyers is more complex. Some, that already have capital and do not heavily rely on mortgages will do better, as the value of the home decreases. The higher interest rates don't effect them as they don't need to take out loans.

Home Buyers w/o Capital: These folks would do worse. The buyers with capital will blunt the effect of higher interest rates. So even though home values would decrease, the decrease will be slightly less than it would otherwise be because those that don't require loans will be unaffected. Thus the total cost of purchasing a home with a large mortgage would increase.

Conclusion: Slowing lending will hurt home owners, banks, and those without much money. It may help people who are already cash rich. It will likely exacerbate inequality, not help it.

Cheaper debt can be canceled out by higher prices. The fact that home values correlate so strongly with interest rates is very tellling. I think the net effect is simply higher asset prices and a greater portion of society's capital locked up in land. Easy money via debts is making every household more levered and more exposed without fundamentally improving access to housing.

> 2) Reduce the amount of lending banks do

> 3) Distant third, if the government has mucked up the tax/renting incentives so much that people are leaving houses empty that should be fixed.

From what I read, the amount of lending banks do is specifically because of government policy. Specifically, fixed-rate 30-year mortgages do not occur in the wild. You're more likely to see 10-year mortgages -- and that means borrowing a lot less.

Just a note number two doesn't express rent or actual home cost. Just home prices.

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